“Mass Affluent” Now Tapping Into Reverse Mortgages

Perceptions turned on their head: now a planning tool for those with stock market investments

When reverse mortgages first entered the marketplace, the perception was that only those people who had no other options for their retirement needed them and pursued them.

That perception is starting to change, as wealthier people and financial planners embrace the concept as a tool to strategize with other retirement investments.

With 75 million Baby Boomers – some 10,000 of them a day turning 65 over the next 15 years – experts say between 10 million and 15 million of them fall in the category considered “mass affluent.”

“It’s a very misleading term, because they’re not massively affluent,” says Barry Sacks, a California tax attorney and author and nationally recognized expert on trends in reverse mortgages. “Rather, there’s a mass of them, and they’re almost affluent.”

So what, exactly, is “almost” affluent?

In a nutshell, they have between $750,000 and $2 million of net worth at retirement. So they’re well off but not wealthy enough to have to worry about their estate tax, like those with $5 million to $10 million in assets. They live comfortably and rely on investments in their 401(k) plan or rollover IRA, and their home is mostly paid off. They might have $750,000 to $1 million in a 401(k) and a home valued at $750,000 to $1 million.

And now, these are the people a growing number of experts say are likely to see the most reverse mortgage benefits. That’s because it doesn’t take into account the volatility of the securities portfolio of the 401(k) account or the IRA. With securities portfolios so volatile and going up and down over the years, drawing from them when it’s down is a mistake, Sacks says. If the poorer returns occur in the early years of retirement, the portfolio is likely to be exhausted if it’s drawn upon continuously.

“Instead of doing that, you use the reverse mortgage credit line to fill in those troughs when the securities portfolio is down so you don’t draw upon the securities,” Sacks says. “If you draw from a reverse mortgage credit line and allow the portfolio to recover, then there’s a far better chance there will be money flowing through a 30-year retirement.”

Paul Fiore, an executive vice president for AAG, the reverse mortgage company that helped this couple buy their dream home, says they’ve seen a growing number of wealthier people enjoying the benefits of a reverse mortgage because they want access to that line of credit in their homes. Financial planning has become a much bigger part of the conversation, and the financial planning community has started to embrace reverse mortgages because there’s less cost attached to it and people see the longer-term value, he says.

“This is not just for the destitute, which is what the perception was for quite a long time,” Fiore says. “That’s when you will start to see the volume increase because people will look at it as a legitimate tool for retirement.”

What the experts say is that older Americans should have a financial planner help develop a strategy that combines income from a reverse mortgage with other assets in their securities portfolio.

“Rather than liquidating their stocks and investments in a down market, they take money out of a line of credit during those down years,” says Shannon Hicks, president of Reverse Focus and a consultant that provides training and technology for the reverse mortgage industry. “Once their portfolio starts to recover, they stop taking it out of their line of credit and resume taking it out of their portfolio. What a study has found is that the likelihood of the borrowing being able to have their portfolio last the rest of their life increased dramatically. In some cases, it went from a 65 percent success rate up to a 90 percent rate.”

Reverse mortgages will be used more by people among the mass affluent than those who are considered super wealthy. The reason is that they can’t benefit because they live at a higher level than a reverse mortgage can give them. (People can only draw from the value of a home is $625,000.)

Fiore says that many people, even if they aren’t wealthy, are looking at ways to make equity in their homes work for them without touching their investments. With the stock market doing well and home prices rebounding from the downturn, some are looking to tap their equity without touching assets that are doing well in the market.

“When the market went south, people were using reverse mortgages to help sustain them because their investments took a beating,” Fiore says. “They needed the reverse mortgage. They want to eliminate the mortgage payment, and they wanted to fund living in their home. Now people are doing better and aren’t feeling that crunch, but they do want to utilize that. They’re in a house that’s $400,000 to $500,000 and don’t owe anything on it. They’re not looking to move but want to be able to use the equity in their home to supplement their income and fund their retirement. People really like that concept now. The financial planning community has really adopted the product in a positive way.”